Educational Articles

Dow 30 Profile: United Technologies

Erik M. Manning
| April 05, 2012

A Formidable Trio

The United Aircraft & Transportation Corporation was formed back in 1929, when William Boeing of the Boeing companies (BA - Free Boeing Stock Report) teamed up with Frederick Rentschler of Pratt & Whitney to form what was essentially an aerospace conglomerate. They set out to claim a stake in all aspects of aviation—a combination of an aircraft engine and airframe manufacturer and an airline business. Moreover, the airline business would serve both the civil (cargo, passenger, private, air mail) as well as the military markets.

The Connecticut-based holding company initially controlled the stock of Boeing Airplane Company, Chance Vought Corporation, Hamilton Aero Manufacturing Company, and Pratt & Whitney Aircraft Company. Sikorsky Aviation Corporation, Stearman Aircraft Company, and Standard Steel Propeller Company were added to United’s portfolio shortly thereafter. These acquisitions were followed by the aggressive purchases of a host of small airlines, which were eventually grouped together and branded as United Air Lines (now United & Continental (UAL)).

In 1934, the U.S. government concluded that such large holding companies as United Aircraft & Transport were anti-competitive, and new antitrust laws were passed forbidding airframe or engine manufacturers from having interests in airlines. As a result, United Aircraft & Transport broke up into three separate companies. The manufacturing interests east of the Mississippi River (Pratt & Whitney, Sikorsky, Vought, and Hamilton Standard) were reorganized as United Aircraft Corporation. Boeing acquired the western manufacturing interests, while the corporation’s airline interests would eventually become United Airlines.

An Aerospace Company

The 1930s was a kind decade to United Aircraft, thanks to military procurement buildups around the world as governments were busy preparing for the possibility of a second world war. United Aircraft sold to both the United States Army and the United States Navy (the Navy’s requirements for carrier-based aircraft were in tune with the specialties of United’s subsidiaries Pratt & Whitney, Vought, and Sikorsky). In 1939, United Aircraft became a component of the Dow Jones Industrial Average, and has remained there ever since.

The United States entered World War II after the attack on Pearl Harbor in December 1941, and United Aircraft attempted to meet the limitless demand for production. It expanded capacity considerably (with the help of tax breaks from Uncle Sam), and business boomed. Indeed, Pratt & Whitney would make over 363,000 aircraft engines; Sikorsky would produce 150 helicopters; and Hamilton Standard would manufacture over 500,000 propellers. The conflict also spurred demand for research & development, which would have a lasting effect on United. Indeed, at the close of the war, the development of jet engines and helicopters were both in their infancy, and many companies, including United, were hoping to capitalize on their growing popularity. United Aircraft entered both industries, via Pratt & Whitney and Sikorsky, respectively.

Pratt & Whitney’s jet program got a late start relative to rivals Rolls Royce and General Electric (GE - Free General Electric Stock Report), which started working on the aircraft in the early 1940s. Eventually, though, the division developed the Pratt & Whitney J57, which would become the most powerful jet engine on the market for a number of years. By 1958, the J57 was powering the Boeing 707, and Pratt & Whitney’s jet engine business was comfortably in the black.

Challenges would remain in the Aerospace market throughout the 1960s and 1970s, as more complex technology and bigger aircraft became the norm. In addition, competition from the likes of GE, Rolls Royce, and SNECMA was stiff. Pratt & Whitney ended up building engines, the JT8D and JT9D, for the Boeing’s 727 and 747, respectively, but the programs, especially the 747, were rocky. Indeed, Boeing and Pratt & Whitney struggled for several years with an aircraft that was too heavy and underpowered. Eventually, after a lot of development work, the program would become a grand success. Meanwhile, Hamilton Standard was busy working on electronically controlled cabin pressure regulating systems that would be equipped in most of Boeing’s offerings.

United Technologies

The biggest change in the history of the company came in 1975, when it changed its name to United Technologies Corporation (UTX - Free United Technologies Stock Report) to reflect the intent to diversify into numerous “high-tech” fields beyond aerospace. The diversification was partially to balance civilian business against any overreliance on military business, but it was also about growth potential. United Tech. almost immediately went on a buying spree, merging with smaller companies or forcibly taking them over. In 1976, United Technologies bought unwilling participant Otis Elevator, the world’s largest manufacturer of vertical transportation systems (elevators and escalators mostly). In 1979, Carrier Refrigeration, which would become one of the world’s largest manufacturers of heating, ventilating, and air conditioning (HVAC) systems as well as a global leader in the commercial refrigeration and food service industries, was purchased in a hostile takeover. That same year, Mostek, an integrated circuit manufacturer, was acquired. (Mostek was later sold in 1985 after years of red ink and declining market share.)

United Technologies would continue along the same path throughout much of the 1980s and 1990s, making smaller acquisitions when the opportunities arose. The next large move was made in 1999, when it bought Sundstrand Corporation. That acquisition was merged with Hamilton, and is one of the world’s largest manufacturers of aerospace systems for commercial, regional, corporate, and military aircraft. It is also a major supplier for international space programs, and a provider of products to the hydrocarbon, chemical, and food processing industries, as well as construction and mining companies.

Soon thereafter in 2001, United Tech. bid for Chubb Security, the first of many that would be placed under the UTC Fire & Security umbrella. It added to this business in 2005, when it purchased Kidde.

This equity should appeal to a wide range of investors. Indeed, we view the blue chip as a solid buy-and-hold candidate. Moreover, the dividend yield is healthy at about 2.5%, which gives this issue a solid income component. In addition, the stock has a below-market Beta and strong balance sheet, which should appeal to conservative investors. Finally, sheer size and scope, the possibility of more acquisitions, and the likelihood of further international expansion give UTX shares excellent long-term growth prospects.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.